Buying Bank of America (NYSE: $BAC)

The relentless selloff in US bank stocks continued today as several of them hit new 52-week lows intraday before staging a strong rally into the close. I believe the selling is unjustified and decided to buy Bank of America ($BAC) at $12.66. The current market reminds me of the 2011 market when fears of a Eurozone breakup caused European bank stocks to plummet. US bank stocks also got hit hard due to fears of European debt holdings, a possible recession, and falling interest rates.

The fears turned out to be misguided as the Draghi-led ECB introduced LTRO and the US economy continued to expand, which led to a doubling of the KBW Bank Index ($BKX) within two years.

$BKX vs $TNX 2011-2016

Interestingly, interest rates continued to fall until 2012 before rising in 2013. However, the US 10-year yield now is at the the same level as in late 2011. The fact that the US banks have much higher share prices than 2011, shows that prices then were irrationally low and were pricing in more than low interest rates. Perhaps those low prices could be partly explained by forced technical selling. In any case, once it was clear that the US economy was not falling into a recession, it made little sense for bank stocks to be trading below tangible book value.

I believe the same realization will dawn on the market over the course of this year. Therefore, buying Bank of America at 80% of tangible book value represents compelling value, particularly if my expectation of the economy strengthening over the next couple of years plays out. Even if the Fed does not raise interest rates much, banks should benefit from higher credit growth and buying back stock at below tangible book value. I will track the performance of my Bank of America holding here.

Be Sociable, Share!